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The first test of the tougher approach came on July 2, 2009, when the city of Jerusalem approved the demolition of an 80-year-old building called the Shepherd's Hotel, once the home of Jerusalem's mufti, or Islamic religious leader. A Florida-based millionaire named Irving Moskowitz, who funds Jewish religious projects "reclaiming" Arab Jerusalem and somehow obtained the title to the hotel more than 15 years ago, wanted to raze the building and erect 20 housing units on the property. Obama's predecessors had mostly looked the other way at Israeli eviction, demolition and construction in land occupied during the 1967 war, even though such activities violated the fourth Geneva Convention, which bars settlement activity in conquered territory. But ignoring the hotel's demolition would undermine the speech Obama had made in Cairo just four weeks earlier, which the Administration had billed as a turning point in U.S.-Muslim relations. With Obama's approval, Hillary Clinton instructed her two deputies separately to dress down the incoming Israeli ambassador, Oren, over the planned demolition in meetings with him July 17 and 18.

The reaction in Israel was immediate. "I'll be damned if they're going to tell me whether I can build in East Jerusalem or not!" Netanyahu told his closest advisers when Oren reported back. On July 19, he said publicly there would be no limits on Jewish construction anywhere in Jerusalem. "I can only imagine what would happen if someone suggested Jews could not live in certain neighborhoods in New York, London, Paris or Rome," Netanyahu said. "There would certainly be a major international outcry." Looking back at this and other Israeli suggestions of anti-Jewish sentiment from Obama, the President's aides claim bewilderment. "They're just fundamentally misreading him," says Ben Rhodes, deputy national security adviser for strategic communications. Powerful Jewish families in Chicago had helped organize, fund and run his election campaign, they noted, and Michelle Obama's cousin was one of the most influential African-American rabbis in the U.S.

But Netanyahu's outburst was, at the very least, shrewd. It uncapped a latent distrust of Obama in Israel, where even cosmopolitan Israelis readily ask Americans if Obama is in fact anti-Semitic. That worry reverberated across the Atlantic to pro-Israel groups in the U.S. The fight with Netanyahu was getting Obama off track with the Jewish community, as members of Congress and others began to complain about his approach. Former Republican presidential candidate Mike Huckabee attended a high-profile dinner at the Shepherd's Hotel in August 2009 and later attacked Obama. Netanyahu offered to suspend eviction, demolition and construction in some of the Israeli-occupied territories but not Jerusalem, and Obama eventually accepted, convinced he could get nothing more.

Over the winter, Mitchell and others worked behind the scenes to start "indirect" conversations between Israelis and Palestinians, hoping the talks would cool the atmosphere and perhaps lead to something more concrete. To "celebrate" the start of those conversations, Biden traveled in early March to Israel, where he was greeted with the announcement by the city of Jerusalem of 1,600 new housing units in the occupied part of the city. The Palestinians immediately canceled the indirect talks. Obama wasn't happy about raising East Jerusalem again, but the Israeli announcement "so called into question our credibility," says a senior Administration official, "that we needed to respond to it." In her bracing Friday-afternoon telephone call to Netanyahu, in which she relayed Obama's disappointment to his Israeli counterpart, Clinton demanded that he temporarily halt construction, demolition and eviction in East Jerusalem. Since that day, U.S. officials have disagreed about exactly what signal Clinton was instructed to send. Ben Rhodes says, "It's factually untrue that the President asked Hillary to tell Netanyahu that he was in any way personally affected by [the announcement]." Philippe Reines, Clinton's spokesman, disputes the senior U.S. and Israeli officials' account of the call. "That was not said," he says.

But the stiff démarche  intended or not  nonetheless seemed to break the logjam. On March 23, Netanyahu and Obama held a one-on-one in the Oval Office with no staffers. Scheduled for half an hour, it ran 90 minutes, the longest meeting Obama had held with any foreign leader. Much of it focused on Iran and issues unrelated to the peace process. But Netanyahu also put a proposal on the table for East Jerusalem, according to Israeli and American sources familiar with the conversation. Obama thought Netanyahu's ideas were promising, and the two men continued the discussion with a handful of staffers, then joined a larger group in the Roosevelt Room.

Obama went to the residence for dinner with his family; Netanyahu continued to work on specific language with U.S. and Israeli staffers in the Roosevelt Room. At Netanyahu's request, Obama returned, in casual clothes, and the two men spent an additional 35 minutes together alone, going over Netanyahu's proposal for getting past the East Jerusalem impasse. When Netanyahu put his new proposal to his closest Cabinet members days later, they approved it. Netanyahu refused to accept a blanket freeze on eviction, demolition and construction in East Jerusalem, but he broke with previous Prime Ministers and offered to allow the Palestinians to reopen paragovernmental institutions in East Jerusalem, say senior Israeli and American officials. It was a rare moment of unity between two opposing worldviews: a symbolic gesture by Netanyahu that satisfied Obama's practical needs.

The New Opportunity
Both sides were shaken by their troubled first year, and the relationship between the two men has remained brittle. Three weeks ago, indirect talks between Israelis and Palestinians began in Jerusalem, but little progress is expected from negotiations between two sides that aren't actually speaking face to face. Obama has spent time this spring repairing relations with American Jewish groups, dispatching top aides David Axelrod, General James Jones and others to reassure them and speaking directly to Jewish members of Congress about the state of relations with Israel. On Iran, Obama's latest push for sanctions has Israelis breathing a sigh of relief that his promises to get tough on Tehran's nuclear program are not just for show.

And then, on May 26, while on a private family trip to Israel, Rahm Emanuel held a meeting with Netanyahu in Jerusalem. During this session, he invited his host to the White House June 1 to discuss Iran and the peace process, after Netanyahu's scheduled visit to Canada. It has quickly turned into a chance for the two leaders to lower the temperature, get past any personal differences and perhaps make progress on the peace process as well. "It's an opportunity to reset the whole thing and turn a new page," says a senior Netanyahu adviser. But neither side is expecting any great leap forward. And the violent confrontation on the Gaza-bound aid ships shows how fragile any improvement in relations will remain.

Netanyahu continues to declare unwavering commitment to Jewish expansion in all of East Jerusalem. U.S. officials say the President is committed to pushing on where so many of his predecessors have fallen short. For as Obama said to Netanyahu in a mid-May telephone call, "Both sides will be held to account for doing things that are antithetical to the peace process."

 With reporting by Aaron J. Klein / Jerusalem

The original story said Avishai Margalit was a professor at Princeton University's Institute for Advanced Study. The Institute is located in Princeton, N.J., but is not affiliated with Princeton University. The article has also been updated to reflect the fact that Netanyahu canceled his June 1 planned meeting with Obama after the deadly Israeli raid of a Gaza-bound aid-ship flotilla.